The R.I.P. Portfolio: Q2 2017 Update

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Includes: AAPL, ACN, AIG, AMGN, AMZN, B, BABA, BAC, C, CAH, CLDR, CSCO, DIS, DWDP, FKINX, GE, GM, HON, INTC, JNJ, KEY, KMG, KR, MET, PFE, RHE, SNC, SPY, SYF, T, TGT, TWTR, TWX, UA, VZ, WNC, XIN
by: WG Investment Research

Summary

This real money portfolio was first introduced in December 2015, and the portfolio has outperformed the S&P 500 since that point in time.

The portfolio has underperformed the S&P 500 over the first half of 2017 but the portfolio's projected annual dividend income is up 46% YoY.

The financial holdings were again the top performers for the portfolio.

The Retire In Peace portfolio, or R.I.P. portfolio, was first introduced to the Seeking Alpha ("SA") community in December 2015 and I have published quarterly articles that captured the activity and performance of the portfolio since that point in time. The holdings of the R.I.P. portfolio are mainly the companies that I write about on SA, so the main purpose for these articles is to allow for my SA followers to track the performance of the stocks that I write about on this platform.

However, I am also interested in hearing from the entire SA community because I learn valuable lessons from the insights that are provided by other contributors. Therefore, I hope that these quarterly updates lead to constructive discussions about the companies that I consider core holdings.

The core holdings - see linked article above for a listing of the core holdings, in addition to each companies' identified short- and long-term catalysts - are not necessarily the companies that I plan to hold for the next 30 years, but instead, they are the companies that I would like to hold for that period of time (i.e. buy-to-hold strategy). I will closely monitor these holdings and will trim, add to, or eliminate positions if a company's "story" materially changes.

The R.I.P. Portfolio's Goals And Strategy

I am building this portfolio with retirement in mind, so I have 30 plus years to invest and make adjustments, so the quarterly volatility is not a major concern. These funds will stay in the market for the foreseeable future, so the portfolio will have the luxury of compounding for many years.

Compound interest is the eighth wonder of the world. He who understands it, earns it..he who doesn't..pays it." -Albert Einstein.

It is also important to note that this is a real portfolio (i.e. real money). The R.I.P. portfolio is made of five different accounts: a Roth IRA, a Traditional IRA, and three taxable brokerage accounts. This is not my family's main retirement assets, but it is a portfolio that I hope will greatly contribute to a stress free and relaxing retirement.

The Goals and Strategy section was last updated in March 2017.

Main Investments (i.e. core holdings) - The companies that are considered core holdings should have established management teams that have proven track records of creating value. Furthermore, the companies should have competitive moats and be above-average operators within the respective industries. The core holdings are mainly large cap companies that are widely held by the financial community.

Goals & Strategy - The portfolio seeks primarily long-term capital appreciation by investing mainly in equity securities of high-quality companies that have already shown the ability to produce sustainable earnings growth.

The portfolio aims to beat the benchmark, the SPDR S&P 500 ETF (NYSEARCA:SPY), by at least 1% on an annual basis.

Missing out on short-term gains and/or having paper losses are not my main concerns, because I plan to stay committed to my long-term strategy of utilizing a bottoms-up investing philosophy to select companies that I plan to hold for many years.

The portfolio has the following allocation targets and acceptable ranges:

Industry Target Allocations Acceptable Range
Industrials/Conglomerates 20% 15-25%
Healthcare 10% 5-15%
Financials 15% 10-25%*
Insurance 5% 3-7%
Technology 10% 5-15%
Telecom Services 10% 5-15%
Media 5% 3-7%
Basic Materials 5% 3-7%
Conservative Allocation Fund 5% 3-7%
Consumer 10% 5-15%
Other** 5% 0-10%

*My educational background and work experience has been in the financial services industry, so I may allocate more to this category from time-to-time. I, however, plan to keep the overall allocation below 30%.

**The Other category comprises of speculative investments in companies that have the potential to create outsized gains over the next three-to-five years (what I like to refer to as "investing in seedlings"). The investments within this category could eventually become longer ranged holdings if after further analysis it is determined that the companies indeed have the attributes that I look for.

Contributions - I plan to contribute between $1,000 and $2,500 of new capital per month to the portfolio and I typically put the new capital to work each and every month, regardless of the performance of the overall market.

Q2 2017 Update

Below you will find the portfolio and its performance, and the activity for the second quarter of 2017.

Price at Beg Value at Activity Quarterly Quarterly Current Unrealized Portfolio Yield Current Annual
Company Ticker # of shares 6/30/2017 3/31/2017 Purchases (Sales) Unrealized G/L Realized G/L Value Gain (Loss) Weighting On Cost Yield Income
General Electric (GE) 392.685 $27.01 $11,610 - $(1,004) - $10,606 $1,689 12% 4.2% 3.6% $377
Baker Hughes (BHI) 14.00 $53.52 - 779 (30) - 749 (30) 1% 1.2% 1.3% 10
Honeywell (HON) 36.58 133.29 4,546 - 330 - 4,876 798 5% 2.4% 2.0% 97
AT&T (T) 111.87 37.73 4,591 - (370) - 4,221 1,150 5% 7.1% 5.2% 219
Verizon (VZ) 72.91 44.66 2,741 725 (210) - 3,256 (226) 4% 4.8% 5.2% 168
Franklin Income (FKINX) 2425.79 2.34 5,652 - 24 - 5,676 842 6% 6.0% 5.1% 291
Walt Disney (DIS) 27.04 106.25 3,066 - (193) - 2,873 942 3% 2.2% 1.5% 42
Bank of America (BAC) 408.83 24.26 9,613 - 305 - 9,918 3,406 11% 3.0% 2.0% 196
Bank of America A Warrants BACWSA 153.00 12.04 1,729 - 113 - 1,842 855 2% 0.0% 0.0% -
Bank of America B Warrants BACWSB 300.00 0.79 275 - (38) - 237 (18) 0% 0.0% 0.0% -
Citigroup (C) 48.77 66.88 2,910 - 352 - 3,261 837 4% 2.6% 1.9% 62
KeyCorp (KEY) 77.47 18.74 1,370 - 81 - 1,452 576 2% 3.7% 2.2% 33
Dow Chemical (DOW) 58.68 63.07 3,197 491 12 - 3,701 705 4% 3.6% 2.9% 108
Synchrony Financial (SYF) 98.41 29.82 2,674 572 (311) - 2,935 609 3% 2.5% 2.0% 59
Target (TGT) 7.08 52.29 386 - (16) - 370 (43) 0% 4.2% 4.7% 18
Kroger (KR) 112.64 23.32 925 2,028 (326) - 2,627 (588) 3% 1.8% 2.1% 56
Johnson & Johnson (JNJ) 24.12 132.29 2,985 - 206 - 3,191 1,049 4% 3.8% 2.5% 81
Amgen Inc. (AMGN) 3.02 172.59 492 - 29 - 522 13 1% 2.7% 2.7% 14
Pfizer (PFE) 120.13 33.59 4,069 - (34) - 4,035 515 4% 4.4% 3.8% 154
Cardinal Health (CAH) 6.00 77.92 - 439 28 - 468 28 1% 2.5% 2.4% 11
American International Group (AIG) 70.14 62.52 4,357 - 28 - 4,385 602 5% 2.4% 2.0% 90
AIG warrants AIGWS 0.00 21.78 1,069 (1,089) 21 (125) - - 0% 0.0% 0.0% -
Metlife (MET) 51.02 54.94 2,675 - 128 - 2,803 867 3% 4.2% 2.9% 82
Xinyuan Real Estate (XIN) 362.17 5.18 1,593 (81) 364 51 1,876 349 2% 9.5% 7.7% 145
Apple (AAPL) 15.28 144.02 2,187 - 14 - 2,201 709 2% 2.6% 1.7% 39
Twitter (TWTR) 86.00 17.87 1,256 37 244 - 1,537 51 2% 0.0% 0.0% -
CISCO (CSCO) 139.30 31.30 3,729 886 (255) - 4,360 705 5% 4.4% 3.7% 162
Intel (INTC) 74.64 33.74 2,529 142 (153) - 2,518 (136) 3% 3.1% 3.2% 81
Cloudera (CLDR) 2.00 15.68 - 36 (4) - 31 (4) 0% 0.0% 0.0% -
Accenture plc (ACN) 5.05 123.68 599 - 25 - 624 48 1% 2.1% 2.0% 12
General Motors (GM) 35.13 34.93 1,228 - (1) - 1,227 142 1% 4.9% 4.4% 53
Alibaba (BABA) 1.00 140.81 - 124 17 - 141 17 0% 0.0% 0.0% -
Adcare Health Systems (ADK) 64.00 0.93 81 - (21) - 60 (40) 0% 0.0% 0.0% -
KMG Chemicals (KMG) 8.00 48.68 369 - 21 - 389 80 0% 0.3% 0.2% 1
State National Companies (SNC) 20.00 18.27 290 - 75 - 365 87 0% 1.7% 1.3% 5
Wabash National Corp (WNC) 21.00 21.94 434 - 26 - 461 85 1% 0.7% 0.5% 3
Under Armour (UA) 19.00 19.80 348 - 29 - 376 33 0% 0.0% 0.0% -
CASH -- -- -- 31 (19) -- -- 11 -- 0% -- -- --
-- -- -- -- -- -- -- - -- - -- -- -- --
$85,606 $5,070 (493) (74) $90,183 $16,708 100% 3.6% 3.0% $2,668
Industry/Portfolio Companies Value Portfolio Weighting Goal Weighting Over (Under)
Industrials/Conglomerates - GE, HON, BHI $16,231.45 18% 20% -2%
Healthcare - JNJ, PFE, AMGN, CAH 8,215.40 9% 10% -1%
Financials - BAC*, C, KEY 16,710.55 19% 15% 4%
Insurance - AIG, MET 7,188.45 8% 5% 3%
Technology - AAPL, CSCO, INTC, CAN, CLDR 9,735.10 11% 10% 1%
Telecom Services - T, VZ 7,476.99 8% 10% -2%
Media - DIS, TWTR 4,409.77 5% 5% 0%
Basic Materials - DOW 3,700.95 4% 5% -1%
Conservative Allocation - FKINX 5,676.34 6% 5% 1%
Consumer - KR, GM, TGT, UA, BABA, SYF** 7,675.35 9% 10% -1%
Other - XIN, ADK, KMG, SNC, WNC 3,151.14 3% 5% -2%
Cash 11.40 0% 0% 0%
100%
*BAC warrants included in value and weighting
**Direct consumer play --read articles on profile for more info

Sales -

(1) AIG Tarp Warrants - Prior to Q2 2017, I decided to reduce my insurance sector target allocation to 5% (down from 10%). The portfolio was too levered to the financial sector and I starting to get somewhat concerned about AIG's near term prospects, so selling the warrants was a fairly easy decision. I, however, still believe that AIG is a great long-term buy at today's price and I may end up repurchasing the AIG Tarp warrants if they drop closer to the $19 range. ^

(2) Xinyuan Real Estate - I sold a few XIN shares to add to my Kroger position after Amazon (AMZN) announced the Whole Foods (WFM) acquisition (i.e. when KR shares were down by ~30% in a matter of weeks). I still have a sizable XIN position and I will most likely add to this position in the future.^

Purchases -

(1) Added to (initiated) the following positions: Xinyuan, Kroger, Cardinal Health, Synchrony Financial, Intel, Cisco, Verizon, Dow Chemical, Twitter, Alibaba, Baker Hughes, Cloudera ^

^ - Subscribers of the Going Long With W.G. marketplace service receive advance notifications/explanations for all purchases and sales, in addition to receiving buy/sell/hold recommendations for all equity holdings of the portfolio. Please consider checking out the marketplace service for your investment research and analysis needs.

Portfolio Performance for Q2 2017 and since the portfolio was first introduced to SA community (December 4, 2015)

Return (Q2'17) Return (YTD) Return (Intro) Cost Basis Review
-0.6% 2.2% 18.9% 32.2%
This period YTD Since Intro Since Intro
Beg. Balance $85,606 $77,428 $52,610 Cost Basis $46,042
Contributions 5,070 10,928 25,250 Contributions 25,250
Unrealized G/L (493) 1,827 12,323 Realized G/L 2,183
Ending Balance $90,183 $90,183 $90,183 Unrealized G/L 16,708
Portfolio Bal. $90,183
Dividend Inc. $598 $1,137 $2,872
Realized G/L (74) 919 2,183 Dividend Income $2,872

Full Disclosure: The American Association of Individual Investors, or AAii, prescribed calculation (The Beginning Vs. the End) was used for calculating the portfolio's return for each period-end.

The largest holding of the portfolio, General Electric, has been under pressure for a while now and the stock's performance has been a major drag to the R.I.P. portfolio's overall performance. GE is down 13% so far in 2017, as the financial community is all but writing the company off.

I, however, am a still long-term believer in this company and I view the recent CEO change announcement as a positive development, because investors lost confidence in the outgoing CEO, Jeffrey Immelt, many years ago. Today, GE shares are reasonably valued based on 2017E earnings and I believe that the company now has the opportunity to capitalize on a positive change to investor sentiment. This digital industrial company's long-term story is still intact so investors with a time horizon longer than two years should stay the course.

Other noteworthy under performers for Q2 2017:

  • AT&T and Verizon - The changing pay-TV space is causing major havoc and it is having a significant impact on the telecom companies. AT&T is battling the government for the rights to acquire Time Warner (TWX) and investors are sour about Verizon acquiring AOL and assets from Yahoo. Both AT&T and Verizon will be long-term holdings in the portfolio for many years and I will likely add to the positions later in 2017, if the stock prices continue to drop.
  • Synchrony Financial - The title to the latest article says it all, "Synchrony Financial: Asset Quality Is A Risk But It Is Not A Showstopper". This private label credit card company has been impacted by higher-than-anticipated delinquencies but, in my opinion, this is a short-term headwind. I recently added to my SYF position and I am still high on the company's long-term business prospects.
  • Kroger - KR shares are down ~30% over the last month due to management lowering the company's fiscal 2017 guidance and fears that Amazon will significantly disrupt the grocery industry. I recently added to my KR position and I may add more shares if the stock price continues to trade around $23/share.

The recent performance of the portfolio is nothing to brag about but it is still outperforming the S&P 500 since December 4, 2015.

The portfolio's outperformance is largely a result of the significant investments made in the financial sector - Bank of America, Citigroup, and KeyCorp - over the last few years.

As shown, the financial sector makes up almost one-third of the portfolio's unrealized gains, with Bank of America being the biggest contributor.

From an income perspective, the projected annual dividend income is trending in the right direction.

The R.I.P. portfolio's dividend income for Q2 2017 was $598, which was ~58% higher YoY and ~11% higher QoQ. Additionally, the portfolio's projected dividend income for 2017 is ~46% higher than 2016. I do not have a written dividend income goal for the portfolio, but I have been focused on investing in high-quality dividend paying stocks since late 2015.

Noteworthy Quarterly News:

General News

(1) AIG's CEO, Peter Hancock, resigned and the company eventually announced the appointment of industry veteran Brian Duperreault as its next CEO.

(2) GE's CEO, Jeffrey Immelt, announced his retirement and the company appointed a GE veteran, John Flannery, to be the new chief executive.

Buybacks And/Or Dividend News:

(1) Johnson & Johnson increased its quarterly dividend by 5% (from $0.80 to $0.85), which brings the forward yield to ~2.5%.

(2) Apple increased its quarterly dividend by ~10.5% (from $0.57 to $0.63), which brings the forward yield to ~1.7%.

(3) Cardinal Health increased its quarterly dividend by 3% (from $0.4489 to $0.4624), which brings the forward yield to ~2.3%.

(4) KeyBank increased its quarterly dividend by 11% (from $0.085 to $0.095) earlier in the quarter. The bank then increased the dividend again in June 2017 by 10% (from $0.095 to $0.105) and initiated a $800m share repurchase program after governmental approval.

(5) Synchrony Financial increased its quarterly dividend by 15% (from $0.13 to $0.15), which brings the forward yield to ~1.7%. Additionally, the company announced a share buyback program of ~$1.6b which equates to ~6% of Synchrony's total market cap.

(6) Target increased its quarterly dividend by 3.3% (from $0.60 to $0.62), which brings the forward yield to ~4.7%.

(7) Kroger increased its quarterly dividend by 4% (from $0.12 to $0.125), which brings the forward yield to ~2.1%. The company also announced that its board app a $1b buyback program.

(8) Citigroup increased its quarterly dividend by 100% (from $0.16 to $0.32) and announced a buyback program of $15.6b.

(9) Bank Of America increased its quarterly dividend by 60% (from $0.075 to $0.12) and announced a buyback program of $12b.

Merger And Acquisitions:

(1) Johnson & Johnson closed its $30b acquisition of Actelion, which will expand the company's already strong pharmaceutical business.

(2) The Dow-DuPont (DD) merger is progressing well and the companies still anticipates for the deal to close in August 2017.

(3) GE closed on its deal to acquire Baker Hughes (NYSE:BHGE) and new shares started trading on July, 5, 2017.

Looking Ahead - It's Not About Tomorrow, It's About 10 Years From Now

Within this section, I provide my thoughts on the current portfolio and how I am trying to position it for the future. This section is only available to Going Long With W.G. subscribers.

Thoughts

I look forward to reading (and responding to) everyone's thoughts on this portfolio, because I believe that the best investment advice is hearing the opposing viewpoint and responding to constructive criticism. I try to contribute at least $1,000/quarter to this portfolio, but sometimes it is a little more or a little less. I will attempt to provide quarterly updates but I may miss some quarters.

Please let me know if you would like for me to incorporate any additional analysis within these updates. Lastly, I will still write about these companies on a regular basis so stay tuned.

All of my investment decisions are made with these two quotes in mind:

Peter Lynch - "Behind every stock is a company. Find out what it's doing."

Warren Buffett - "Successful investing takes time, discipline andpatience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting ninewomen pregnant."

If you found this article to be informative and would like to hear more about these companies, please consider hitting the "Follow" button above or subscribing to the Going Long With W.G. marketplace service.

Disclosure: I am/we are long GE, BAC, T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.